Henegan v. Merchants Mutual Insurance , 294 N.Y.S.2d 547 ( 1968 )

Tilzer, J.

The issue posed by the present appeal is whether an action may be maintained against an insurance company for its bad faith and/or fraud in failing to settle a negligence case in the absence of a showing that the plaintiff insured has paid the excess judgment recovered against him. The court below answered this question in the negative and accordingly dismissed the complaint at the close of plaintiffs’ case on the sole ground of a failure of proof of loss.

This question has not been passed on by the courts of this State, although some 40 years ago the Court of Appeals ruled that an insurance company “ in the handling of the litigation or in failing to settle is liable for its fraud or bad faith ” (Best Bldg. Co. v. Employers’ Liab. Assur. Corp., 247 N. Y. 451, 453). Our review is thus limited to the issue of damages, to whether plaintiffs made out a prima facie case in this regard, and we do not consider whether in the handling of the litigation or in failing to settle the insurance company was guilty of fraud or bad faith.

We join with the majority of jurisdictions in this country in concluding that an insured is damaged, that he has suffered a loss or injury, upon entry of the excess final judgment in the damage suit case. Reason as well as economic fact dictates that the mere existence of an excess final judgment causes harm to the judgment debtor. The judgment increases his debts, it damages his credit, it subjects his property to the lien of the ubiquitous judgment. An insurer which has been guilty of bad faith, one which has deliberately shackled its insured with the crippling jeopardy of a large excess judgment, may not insist that the insured must sacrifice his assets and pay the judgment before suit. The very nature of the risk insured against prohibits the imposition of such prerequisite. (Alabama Farm Bur. Mut. Cas. Ins. Co. v. Dalrymple, 270 Ala. 119 [1959]; Farmers Ins. Exch. v. Henderson, 82 Ariz. 335 [1957]; Southern Farm Bur. Cas. Ins. Co. v. Mitchell, 312 F. 2d 485 [C.A. 8th, 1963]; Brown v. Guarantee Ins. Co., 155 Cal. App. 2d 679 [1957]; Burton v. State Farm Mut. Auto. Ins. Co., 335 F. 2d 317 [C. A. 5th, 1964]; Smoot v. State Farm Mut. Auto. Ins. Co., 299 F. 2d 525 [C.A. 5th, 1962]; Henke v. Iowa Home Mut. Cas. Co., 250 Iowa 1123 [1959]; Sweeten v. National Mut. Ins. Co. of D. C., 233 Md. 52 [1963]; Wessing v. American Ind. Co. of Galveston, Tex., 127 F. Supp. 775 [U. S. Dist. Ct. W. D. Mo., 1955]; Jessen v. O’Daniel, 210 F. Supp. 317 [Mont., 1962]; Gray v. Nationwide Mut. Ins. Co., 422 Pa. 500 [1966]; Southern Fire & Cas. Co. v. Norris, 35 Tenn. App. 657 [1952]; Seguros Tepeyac, S. A., Compania Mexicana v. Bostrom, 347 F. 2d 168 [C.A. 5th, 1965]; Murray v. Mossman, 56 Wn. 2d 909 [1960]; Schwartz v. Norwich Union Ind. Co., 212 Wis. 593 [1933].) The Sapreme Coart of Pennsylvania in Gray v. Nationwide Mut. Ins. Co., (supra, p. 506), noting that there was no Pennsylvania decision directly in point, concladed that “ Three very soand reasons ” jnstified the adoption of the view that payment of the excess jndgment was not a prereqaisite to a canse of action against the insnrer: “ (1) sach view prevents an insnrer from benefiting from the impecanioasness of an insared who has a meritorioas claim bat cannot first pay the jndgment imposed apon him; (2) sach view negates the possibility that the insnrer woald be ‘ * * * less responsive to its trast daties where the insared is impecanioas than where the insared is able to pay the excess jndgment. Were payment the rale, an insnrer with an insolvent insared coaid anreasonably refase to settle, for, at worst, it woald only be liable for the amoant specified by the policy. To permit this woald be to impair the asefalness of insarance for the poor man,’ Note, 27 U. Pitt. L. Rev. 726, 728 (1966); (3) sach view recognizes that the fact of entry of the jndgment itself against the insared constitates a real damage to him becaase of the potential harm to his credit rating ’ ’.

We note that althoagh the $10,000 policy limit has been paid to the claimants for the wrongfal death of their intestate, enforcement of the excess jndgment against the plaintiffs has been deferred pending determination of this action. To hold that prior payment mast be shown before action by the insared, woald permit the insnrer to take advantage of the financial stains of its insared and deprive the al tímate beneficiary claimant of his jndgment. Sach a holding woald be contrary to the parpóse and spirit of oar law (Harris v. Standard Acc. & Ins. Co., 297 F. 2d 627 [C.A. 2d, 1961], J. Joseph Smith, J., dissenting, pp. 637-638, cert. den. 369 U. S. 843; Insarance Law, § 167). We mast add that the trial coart’s reliance apon Harris v. Standard Acc. & Ins. Co. (supra) was misplaced. The majority opinion in Harris stated that it was not its holding that damage can never arise merely on rendition of the jndgment (p. 633). Harris does stand for the proposition that an insared is not damaged by an excess jndgment where he was insolvent before the rendition of the judgment and, furthermore, was discharged in bankruptcy from paying the judgment.

Finally, we observe that while the cause of action with which we are concerned is one for excess liability as distinguished from one for an amount within the policy limits, we view each as sounding in contract and complete the moment judgment was entered. As to the latter, under the plaintiffs’ liability policy the insurer expressly bound itself ‘ ‘ To pay on behalf óf the assured all sums which, the assured becomes legally obligated to pay as damages because of bodily injury, sickness, or disease, including death at any time resulting therefrom.” As to the former, the instant action for breach of the implied covenant of good faith in the handling of the litigation and in the settlement of the action, damage and loss was sustained and the cause of action accrued upon entry of the excess judgment against plaintiffs. Actual payment of the excess of the judgment rendered against the insured is not a condition precedent to suit.

The judgment dismissing the complaint for failure of proof of loss should be reversed, on the law, and a new trial ordered, with $50 costs and disbursements to abide the event.

Botein, P. J., Stevens, Eager and McGtvern, JJ., concur.

Judgment unanimously reversed, on the law, and a new trial ordered, with $50 costs and disbursements to abide the event.